How does inflation affect shares?

MrMartyn

I keep reading that inflation is erroding the value of cash savings because bank accounts pay interest rates that are lower than inflation.

What about the stockmarket then? How are shares affected by inflation?

If I had say, £5000 to invest, would it be better protected from inflation if I put it into my FTSE All-Share index-tracking ISA, compared with if I just put it in a savings account?


Thanks,
MrMartyn

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability for anything I post here.

opinions4u

Inflation affects the "real" value of shares in the same way.

High inflation v low or negative value growth = loss of value.

But shares offer two potential returns: Capital growth and dividend payments whereas cash savings don't. Of course, this needs to be balanced against a potential capital loss if share prices fall.

C_Mababejive

Many shares actually provide a hedge against inflation. For example,if you buy shares in an oil and gas company,you lockin the price you pay for them at purchase,the companies products rise over time whilst during the current bully boy period,employee costs go down =rise in profit.

Heres an example. What was once £2.50 is now £15.00..how did that happen...?

http://uk.finance.yahoo.com/echarts?s=BG.L#symbol=bg.l;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

qpop

The academic argument is that a well-run company (famous last words) will increase its profits ahead of inflation (which is the basic aim of most businesses), and therefore the dividend to the shareholders of a well-run company will be an inflation hedge.

SnowMan

[FONT=PIHKKB+TimesNewRoman,Times New Roman]There is the possibility that inflation will exceed the return on savings accounts over time. But over time you have to discount for inflation wherever you invest your money.

Whether you invest it in savings or shares, inflation will still have its eroding effect on what your money grows to.

The reason to invest in shares is to take some risk in order to hopefully get a higher return and to provide diversification by spreading your money across different asset classes.

Investing in shares doesn't provide any special protection against inflation. To quote from an old book I have (General Introduction to Institutional Investment, AJ Frost, DP Hager p150) "Although UK shares may be expected to earn long-term returns more than sufficient to offset the effects of price inflation, inflation is only one of the many determinants of share prices, and even over periods of some years there may be no clear link between share prices and inflation. Recent indications are that the higher the level of price inflation, the lower the likely level of real return"

Which brings us back to the simple answer:

[/FONT][FONT=PIHKKB+TimesNewRoman,Times New Roman]Whether you invest it in savings or shares, inflation will still have its eroding effect on what your money grows to.[/FONT][FONT=PIHKKB+TimesNewRoman,Times New Roman]
[/FONT]

qpop

There is a really interesting read about the "real" return of various asset classes over the last 100 years or so, paid for by Credit Suisse:

https://www.credit-suisse.com/investment_banking/doc/cs_global_investment_returns_yearbook.pdf

It's fairly dryly written but has some really useful information in it.

atush

Inflation can affect compaies the same way as individuals in that their costs go up (for energy, raw materials etc).

But, unlike individuals who tend to be end consumers, companies can pass on these costs and stay in profit.

Or they can be producers of comodities that are going up (such as miners/utilities) and reap higher profits.